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IRS Fills in Details of One-a-Year IRA Rollover Rule

The
IRS clarified how the recently announced change in how it
interprets the statutory one-rollover-per-year rule for
individual retirement arrangements (IRAs) will affect 2014
rollovers and how the rules will apply starting in 2015 (Announcement 2014-32).

Sec.
408(d)(3)(A)(i) permits a tax-free rollover of funds in a
taxpayer’s IRA as long as the amount distributed to the
taxpayer is paid into an IRA for the taxpayer’s benefit within
60 days, subject to the one-rollover-per-year limit of Sec.
408(d)(3)(B). Prior IRS guidance had applied this rule on an
IRA-by-IRA basis. However, the Tax Court in Bobrow, T.C. Memo. 2014-21,
applied the rule on an aggregate basis, meaning no matter how
many IRAs a taxpayer has, the taxpayer is limited to one
rollover per year. In March, the IRS announced it would follow
the Bobrow decision.

The application of the
one-per-year limit on an aggregate basis will start in 2015,
meaning that an individual receiving an IRA distribution on or
after Jan. 1, 2015, cannot roll over any portion of the
distribution into an IRA if in the preceding one-year period
the individual has received a distribution from any IRA that
was rolled over into another IRA. As the IRS specifically
noted in Announcement 2014-32, a rollover between an
individual’s Roth IRAs would preclude a separate rollover
within the one-year period between the individual’s
traditional IRAs, and vice versa.

The announcement also
contains a transition rule. For 2015, the IRS will disregard a
distribution occurring in 2014 that was properly rolled over
to another IRA, in determining whether a 2015 distribution can
be rolled over, as long as the 2015 distribution is from a
different IRA that neither made nor received the 2014
distribution. The aggregation rule will apply to distributions
from different IRAs only if each distribution occurs after
2014.

The IRS made it clear that this new rule does not
apply to Roth conversions, trustee-to-trustee rollovers, or
rollovers between qualified plans and IRAs. It also explained
that trustee-to-trustee rollovers include both direct
transfers between trustees and rollovers where IRAs issue
checks payable to the IRA trustee. The IRS is encouraging IRA
trustees to offer to do direct rollovers to individuals
requesting rollover distributions so that account holders will
not be subject to these rules.

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